Sadly, most Americans are in debt. Mortgages not withstanding, credit cards and vehicles encompass most of our debt. The most unfortunate aspect of our debt levels is the ignorance with which it is treated. We think that it is normal or expected of us to be in debt, so we deal with it. Paying the minimum balances on our cards, and scraping change together to pay the car payment is not the way to get ahead financially. With a good plan in place and plenty of patience, debt can be fought off. There are a huge number of resources that can help you get rid of debt. Some are good and some are bad.
Your goal should be to find the plan that works best for you, and begin to eradicate your debt with all of the focus and energy you have. It may take a few tries to discover what method works best for you, and that is OK. Patience is necessary, and flexibility will assist you in finding your most effective plan.
Every extra penny at your disposal should be used to pay down balances. Even small wins can become big ones. Stop eating out as much. Pay more attention to energy consumption. Trim your cable or cell phone plans. Save your change or set aside just a few dollars per day, it will add up quickly. Get a piggy bank and keep it in plain sight. Add money every day, and when you do go to collect it, put that money toward debt. Put all of these smaller wins together and put all of it toward debt reduction. Small gestures like this will make a bigger dent in your debt than you would think. It is also necessary to avoid all “splurges” such as vacations or expensive gifts while paying off debt. These more expensive items may be the reason you are so far in debt in the first place.
These companies, like any business, are looking for a profit. Their secondary goal is to help you get out of debt. There are far too many of these firms that have done little or nothing at all for consumers looking for a helping hand. It only takes one to ruin it for the rest. Some of these companies operate in the “non profit” sector and some are public. It is hard to discern between the good and the bad. If you are absolutely at rock bottom and feel that your choices are debt consolidation or bankruptcy, do your research and see if one of these companies can help. Only use them as a last resort.
Do not get caught up in the transfer game. Finding lower interest cards and transferring the balances will not make as much of a difference as you would think. The same goes for 0% introductory rates. Applying for too many cards will hurt your credit score, and can put you in a deeper hole if you lose track of what balances are where or when they are due.
How to get rid of the balances:
The debt snowball is a method of debt reduction that is heavily preached by personal finance “guru” Dave Ramsey. Any search for debt snowball will give you a great idea of how this methods works. In a nutshell, you make a list of all debts, smallest to largest. Pay minimum balances on all but the smallest, concentrating all extra debt reduction funds on that smallest balance. Once that is paid off, attack the next smallest balance with its own minimum payment, plus the extra from the normal payment from the balance you just paid off and the extra that you were pumping into the first balance. I realize that was a long-winded sentence, but here is how it would look with a very simple table.
|Car (min payment-$300)|
|Month 2||$200 ($30 min+$220 extra)||$1420 ($80 min)||$4700|
|Month 3||$0 ($200 payoff)||$1290 ($80 min+$50 extra)||$4400|
|Month 4||$0||$960 ($80 min + $250)||$4100|
|Month 5||$0||$530 (80 min + $250)||$3800|
Even thought interest is not calculated here, you can see that with the snowball method, your first credit card is paid off in 2 payments. All of the extra from the first card then goes to card two. In two months, card 2 will be paid off, and then extra will be applied to the car payment.
The idea behind the debt avalanche is not unlike the debt snowball method. The difference is that instead of paying smallest balance first, you pay highest interest rate first. Mathematically speaking, the debt avalanche is the best method to pay off debt. When paying with this method, you will be concentrating all extra funds to attack the interest as opposed to eliminating the overall number of accounts.
While both the snowball and avalanche are effective, it is up to you to decide which method to use. If paying the least amount of interest is most important to you, and you can overlook a potentially longer payment time line, use the avalanche method. If it is important to knock off each account one by one, use the snowball. It has worked well for me. I enjoy celebrating when an account has a balance of zero. This may come slightly more often with the snowball method than with the avalanche method.
Regardless of how you choose to eliminate your debt, the feeling of pride and accomplishment that comes with progress is amazing. A well thought plan will make all of the difference when paying off debt. It could be the difference between taking decades, years or mere months.